CAIS Trustee/Heads Conference Managing Financial and Operational Risk in Independent Schools

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CAIS Trustee/Heads ConferenceManaging Financial
and Operational Risk in Independent Schools

• January 23, 2010
• Presented by
• Bolton Company Insurance Brokers Ronald
  Wanglin, Chairman/CEO, and Cheryl McDowell, Vice
  President, Education Practice Group
• DKG ConsultingDenise Gutches, Business
  Management Consultant

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Session Overview

• Financial Risk Management What Does This Mean
  and Who Is Responsible for What?
• Board Oversight and Operational Risk Management
• Recommendations for Best Practices
• Current Critical Issues Hot Buttons!
• Resources for Financial Risk Management

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School Risk Management

• Risk brings opportunity as well as potential harm
  to an organization.
• Managing financial risk means maximizing
  opportunities and minimizing harm.
• Risk permeates every function within the
  organization
• Strategic
• Legal/Fiduciary
• Financial
• Operational
• Reputational/Political

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Risk Management

• What is risk management in an Independent School?
• It is a discipline that should be practiced at
  all levels and functions.
• It is a continual process in the schools
  management and methods of operation.
• It is proactive, not reactive.

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Risk Management and Board Governance

• "There is no way a board can establish
  sufficient policies and procedures in order to
  eliminate all risk and resulting law suits, but
  risk can be managed in order to keep litigation
  to a minimum. 
• The board's role is to assure that the
  appropriate policies--such as personnel, student
  activities and behavior, crises management, and
  financial management--are in place and that the
  school is following those policies and the
  resulting procedures every day in a consistent,
  fair manner
• NAIS Trustee Handbook Chapter 2 Keeping the
  Mission and Serving as the Fiduciary of the School

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The Boards Work

• Fiduciaryprotecting the school to ensure
  achievement of mission
• Strategicthinking about strategic and tactical
  moves to make the school sustainable
• Generativevisionary thinking

Dick ChaitThe New Work of th Board
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Managing Financial Risk

• Strategic Planning/Financial Planning
• Tactical moves in the midst of economic
  uncertainty
• Re-think the financial model
• Freeze the size of staff and grow the size of
  student body
• Adopt discipline that wont add new program
  without subtracting old program
• Marketing
• Ensure the price value proposition is clearmake
  your school a necessity for families not a luxury

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Responsibilities forRisk Management

• Board of Trustees
• Head of School
• The Business Officer
• Human Resources
• Other Operational Personnel
• Outside Consultants

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Financial Risk Management and the Boards Role

• Place on the schools strategic agenda.
• Make a commitment to risk management oversight.
• Integrate into all areas of operations.
• Make a part of every decision making process.
• Support the Head of School in efforts to manage
  risk.
• Make professional expertise available as
  appropriate.
• It is difficult to figure out the questions you
  are not asking, so ask lots of questions and pull
  on every thread you can.

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The Boards Role

• Financial Risk Management and the Audit
  Committees Role
• Determine whether the school has the appropriate
  policies and procedures in place to minimize
  risk?
• Assessment of financial risk and exposure
• Assure adequate funding for staffing, and
  facilities maintenance/repairs to minimize risks
• Require annual reporting updating risk management
  program
• Conduct a Risk Management Audit

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Risk Management and the Heads Role

• Promoting risk management throughout the school
  community.
• Ensuring that risk management is delegated to the
  appropriate individuals within the organization.
• Monitoring the program and keep the Board
  apprised of its implementation.

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Internal Risk Management AuditTEN KEY AREAS

• Board Oversight on Fiduciary Matters
• Operating Policies
• Student Programs and Activities
• Facilities Managementmaintenance, safety,
  security
• Human Resourcesemployment practices, handbooks,
  records management

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Internal Risk Management AuditTEN KEY AREAS

• Legal compliancereport filings, contracts
• Technologyinternal controls, safeguarding data
  assets
• Admissionsservices, activities and policies
• Fundraisingservices, activities and policies
• Environmentalindoor air quality, noise, lighting
  hazardous materials

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The Risk Management Committee
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Risk Management Audit

• Identify potential risks in each area
• Understand degree of risk exposure
• Likelihood of exposure
• Extent of Potential Loss
• Type of exposure that could occur

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Responsibilities of The Risk Management Committee

1. Identify and analyze loss exposures
2. Examine alternative risk management techniques
3. Select Risk Management techniques
4. Implement Risk Management techniques
5. Monitor results

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Risk Management Insurance

• Audit Existing Insurance and Risk Management
  Program
• Benchmark Existing Coverage and Limits
• Evaluate Assumption of Risk
• Self Insurance
• Deductibles
• Risk Retention Groups

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Risk Management Insurance

• Understand
• insurance policy structure what claims reduce
  what limits
• incident/claims reporting requirements
• how specific coverage works relative to other
  coverages
• covered/excluded perils, including catastrophic

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Risk Management Insurance

• Dont shop on price alone know what you are
  buying
• Dont use multiple insurance brokers use a
  broker selection process (RFP/RFQ)
• Address Key Person financial exposure
• Be informed of new insurance products that may
  cover uninsured exposures

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Risk ManagementIntegrity of School Financial
Affairs

• School stakeholders want the assurance and
  confidence that financial affairs are handled
  ethically and with integrity
• Legislation of the past 5 years highlight the
  need to implement the appropriate policies and
  procedures to eliminate risk of financial
  misstatements

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• Recommendations for Best Practices

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Risk ManagementBest Practices

1. Place on the Boards strategic agenda
2. Employ long-term thinkingproactive not reactive
3. Establish an Audit Committee or Clarify Audit
   Committees Role in Risk Management Oversight
4. Conduct Internal Risk Management Audit and Update
   Annually

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Risk ManagementBest Practices

• Implement critical policies and update regularly
• Conduct Insurance Risk Management Audit
• Review and benchmark results on a peer to peer
  basis
• Review and benchmark employee benefits/retirement
  plans

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Policies Schools Should Have

• Annual Audit Policy
• Conflict of Interest
• Whistleblower
• Document Retention/Management
• Banking and Cash Management Policies
• FundraisingGift Acceptance and Gift Management
  Policies
• Endowment Investment Management and Spending
  Policies
• Employment Policies and Practices
• Financial Aid and Tuition Assistance Policies
• Facilities Management Policies and Practices

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Current Critical Issues in Risk ManagementHot
Buttons
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Hot Buttons

• Ethics and Risk Management
• Tone at the Topmanagements ethics and integrity
  are unimpeachable and tone permeates organization
• Conflicts of Interest
• Policies to safeguard against actual and
  perceived conflictshow transactions identified
  and brought to the Board process to identify
  excess benefits.
• Contemporaneous discussion and documentation is
  critical.

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Hot Buttons

• Regulatory Compliance
• Awareness of breadth and nature of regulations
  the school is subject to and protocols for
  compliance
• IRS990s 403(b) retirement plan changes
• OSHA
• Federal funding

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Hot Buttons

• Financial Misstatements and Risks
• Assessment of risk of material misstatement
• Identification of major risk areas (i.e. debt
  covenants)
• Management incentive to distort reported results
• Occurs due to ethical tone, control environment
  and staff training and capacity
• Financial fraud and exposures
• Check forgeries
• Credit card usage

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Hot Buttons

• Fundraising
• Collectability of pledges
• Events yielding budgeted net revenue
• Capital campaigns and impacts on related projects
• Admissions and Student Retention
• Understanding impacts on student enrollment and
  external environment.
• Goals regarding student enrollment realistic to
  trends.
• Strategies to address declining enrollment.

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Hot Buttons

• Employment Risks
• Impacts of compensation decisions on employees
• Increased incidence of workers compensation
  claims
• Increased employment practices liability claims
• Increase in premiums and experience modification
  factors

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Hot Buttons

• Investment and Debt Management
• Ensure clear understanding of investments and
  debt covenants and how they work.
• Multiple revenue streams creates complexity in
  control structures requiring skill-sets staffing
  may not possess.
• Investment policyacceptable investments, asset
  classes, etc.
• Changes in investment managers.
• Comparison of investment returns to industry, to
  budget expectations, etc.
• Debt capacity.
• Credit rating/Letter of Credit renewals

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Checks and Balances

• Recognition of risks and exposures
• Implement systems and controls to ensure
  compliance and risk management is working
• Monitor regularly policies, procedures and
  practices

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Keep the Risk Management Program Dynamic

• Remain alert to developing risks.
• Adapt the risk management program and plan
  accordingly.
• Be flexible to keep pace with ever-changing
  environment.
• Tap available expertise and resources to stay
  apprised of the risk environment
• Trustees
• Insurance brokers
• Professional associations

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Resources

• Insurance Broker
• Insurance Company Loss Control Dept.
• Outside Consultants
• Police
• Fire
• Health Inspector
• Utility Company
• OSHA Inspector
• Physicians
• Lawyers
• Architects
• Investment Manager